Lower headline inflation seen to cause decline in market interest rates this year

By Melissa Luz T. Lopez, Senior Reporter
LOWER INFLATION will trigger a similar decline in bond yields this year, analysts at First Metro Investment Corp. (FMIC) said, together with expected rate cuts from the central bank.
Analysts from the Manila-based investment firm said market interest rates will likely mirror a downtrend in consumer prices for 2019, as expected by authorities and market watchers.
“Slower global economic growth, a likely pause in [Federal Reserve] policy rate hikes in 2019, low crude oil prices and quickly decelerating domestic inflation should provide a good basis to be optimistic for the bond markets in 2019,” analysts at FMIC said in a recent report.
“We think that the PH yield curve will likely go down in parallel fashion in tandem with domestic inflation and a likely cut in BSP (Bangko Sentral ng Pilipinas) policy rate looms for H2-2019.”
From a nine-year high of 6.7% in September and October, headline inflation eased significantly to six percent in November and to 5.1% in December, according to the Philippine Statistics Authority.
The lower readings for the last two months put 2018 headline inflation at an average of 5.2%, matching the full-year estimate of the central bank, but was higher than the 2.9% rate logged in 2017.
Economic managers of President Rodrigo R. Duterte said the worst is over for commodity prices, with inflation broadly expected to return to the 2-4% target range this year.
FMIC shared this view, noting that this will also pull down market yields as investors become more at ease.
Expected cuts in bank reserves by the BSP — which FMIC sees happening between January-March — should also help boost market liquidity, the analysts said. This will be followed by a reduction in the key policy rate, with the current 4.75% the highest in nearly a decade.
“In short, the focus for Philippine bonds would then be on domestic inflation and borrowing requirements of the national government and banks,” the report noted.
Increased borrowing requirements by the state will be supported by “additional domestic savings” drawn from a fast-growing economy, while corporates will be encouraged to float retail bonds at a time of dwindling inflation, FMIC added.
The state plans to borrow P1.189 trillion in 2019 to fund its spending plan, largely to support its higher infrastructure targets. Of the amount, 75% will be sourced domestically while the remainder will be from foreign creditors.